First Quarter 2023 Growth Report – Presented by Mark K. Lund
When Staying Calm Seems Like a Contrarian Course of Action
The behavior of the market over the first quarter of 2023 shows, among other things, just how much the major indexes ignore the calendar. With a volatile 2022 behind us, many expected the market to turn over a new leaf and get back to doing what it’s supposed to do—rise steadily.
However, financial markets seldom meet expectations.
Stubborn inflation, an unpredictable job market, and declines in formerly high-flying sectors like tech, have led to ongoing intervention by the Federal Reserve. This, in turn, has made for a bumpy ride. Every day the markets are open there seems to be either a drop in share prices as fear grips investors, or a sudden spike caused by speculators hoping for a quick gain.
In other words, we’ve been seeing volatility caused by the perennial human emotions of fear and greed.
Prudent investors with long-term goals know that strong emotions are often a part of investing. Sometimes you just can’t help experiencing them. But those with a long-term plan also know that reacting to emotions by taking immediate action— just doing something—can harm their returns. Any response is usually too late to do any good. And needless transaction costs create a further drag on performance.
Legendary investor Warren Buffet has said that his company doesn’t ignore the emotions driving the market. Instead, they purposely act counter to them. In a shareholder letter he said that occasional outbreaks of those two contagious diseases (fear and greed) will always occur in the investment community.
However, Buffett writes, “we attempt to be fearful when others are greedy and to be greedy only when others are fearful.”1
In this case he means that he buys when others are irrationally selling, and is happy to sell at a premium when others are frantically buying.
Since he began investing in the 1940s, Buffett has seen many dire challenges to economic growth.
Yet each time, our system has figured out a way to either solve these problems or work around them, rewarding optimists with healthy returns.
“Our country’s almost unbelievable prosperity has been gained in a bipartisan manner,” writes Buffett. “Since 1942 we have had seven Republican presidents and seven Democrats.” Those eight decades have seen plenty of economic trouble: runaway inflation, double-digit interest rates, collapsing bubbles in major sectors, soaring deficits, and more. All were crises that leading experts predicted would collapse the system.2
Yet long-term investors over that span have been generously rewarded.
The year 1942 is significant for Buffett. WWII was not going well, with the Allies being driven back on several different fronts. Morale at home was low. Economists were pessimistic. Yet this is the year when 11-year-old Warren invested everything he had ($114.75) in U.S. stocks.
Buffett points out that if he had followed the advice of the doomsayers at the time, he would have instead invested in 3.5 ounces of gold.
“And what would that supposed protection delivered?” he writes. “You would now have an asset worth about $4,200 . . .”
On the other hand, he notes, if he had invested his $114.75 in a no-fee index fund that tracked the S&P 500, it would have grown to $606,811.3
The reason Buffett is so confident that the market will reward investing against the prevailing emotion, is because he’s observed a long-term trend he calls “The American Tailwind.”
He writes, “Leaving aside congenital pessimists, Americans believed that their children and generations beyond would live far better lives than they themselves had led…the nation expected post- war growth, a belief that proved to be well-founded. In fact, the nation’s achievements can best be described as breathtaking.”
Trusting that this trend will continue, Buffett is proof
against the greed and fear roiling the markets on any given day.
Buffett’s faith in The American Tailwind isn’t a naive belief that significant downturns and corrections will never happen. Rather, it’s the long perspective that hard times don’t last forever and even the most difficult moments in history will eventually become history.
This next quarter is sure to have its share of challenges for central bankers, corporations, and investors. But each component of our market system and every sector involved in the market is motivated to make the best use of their capital resources for the benefit of their shareholders.
The Kipling quote above (written to his son but applicable to us all) is a reminder that turmoil and the emotions that go with it will always be a part of life. But if, when everyone else is acting out desperation, you can decide not to participate, you will not only fare better in the long run, but also enjoy greater peace of mind.
Stonecreek Wealth Advisors, Inc., A Financial Advisor in Utah
11576 S State Street, Bldg. 1002
Draper, UT 84020
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